Shanghai steel slides after recent rally, but sentiment still upbeat

Chinese steel futures dropped more than 3 percent on Wednesday after recent sharp gains that lifted prices to their strongest level in three months, although firm demand and tight supply kept investor sentiment upbeat.

The pullback in steel prices also dragged down raw materials iron ore and coking coal, which similarly climbed to three-month peaks earlier this week, and followed a selloff in China-traded base metals led by copper as investors cut their exposure to risky assets.

The most actively traded rebar for May delivery on the Shanghai Futures Exchange closed down 3.3 percent at 3,916 yuan a tonne.

“Most people are still unsure as to what exactly happened or changed but as far as I can tell the market got caught long and wrong and very much the wrong side of a dominant Chinese speculative flow,” Matt France, head of institutional sales for metals in Asia at Marex Spectron, said in a note.

The construction steel product touched 4,104 yuan on Monday, the highest since Sept. 6, and some analysts say the strength could last.

Steel demand in China has been stronger than expected despite the seasonal slowdown during winter, with construction activity in eastern and southern parts of the country “quite robust,” said Richard Lu, analyst at CRU in Beijing.

This combined with tighter supply as 28 mills in northern Chinese cities curb production in line with Beijing’s campaign to fight smog over winter, he said.

“There are also proactive closures in cities outside the 28 required, so perhaps in December we may see even less steel production,” said Lu. “Inventories are coming down and market is quite tight.”

Chinese traders’ stocks of rebar stood at 3.03 million tonnes as of Dec. 1, the lowest since at least 2011, according to data tracked by SteelHome consultancy. Iron ore for May delivery on the Dalian Commodity Exchange fell 4 percent to 523 yuan a tonne. Coking coal dropped 1.1 percent to 1,363.50 yuan per tonne.

Iron ore for delivery to China’s Qingdao port fell 1.3 percent to $71.77 a tonne on Tuesday, after hitting a nearly three-month high the day before, according to Metal Bulletin.

“Traders continue to snap up any available cargoes, with particular interest in high grade iron ore,” ANZ analysts said in a note.

“Investors in China were a little bit more circumspect, with losses in the base metals sector curbing their enthusiasm for the steelmaking raw material.”